A retail shop selling tablet devices purchases them in boxes containing 20 table

Question

A retail shop selling tablet devices purchases them in boxes containing 20 tablets each. The shop has forecasted that annual
demand will be 4,000 tablets. The ordering cost is $18 per order, and there is a carrying cost of $4 per unit. The company would like
to compare ordering and carrying cost when they purchase an optimal order quantity. What is the relationship between the total
ordering costs and the total carrying cost in this situation? (Round your number of units to the nearest whole number).
Total carrying cost and total ordering cost are equal
Total ordering cost is slightly higher than total carrying cost
Total carrying cost is slightly higher than total ordering cost
This question cannot be answered with the information that has been given.

Explanation / Answer

Correct Answer:

C

Working note:

Optimal order quantity (EOQ) = (2*annual demand*ordering cost/holding cost)^.5

Optimal order quantity (EOQ) = (2*4000*18/4)^.5 = 189.9 or 190 units.

Since, the order goes in number of boxes, then

No. of boxes = 190/20 = 9.5 or 10 boxes or 200 units

Ordering cost = (4000/200)*18 =$360

Carrying cost = (200/2)*4 = $400

So, carrying cost will be higher than the ordering cost.

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